CAP Rate

What is considered as good cap rate in the current market for retail or medical office property?
I see the CAP in the range of 6 to 10 depending on the property/location etc.
In Buying Property - Asked by Srini P. - Jun 23, 2009
Report Abuse
Answer this Question

Answer(s)

Jessica K.
Broker/Agent
Snellville, GA

which state is the best one to invest your money in for commercial property?

Jun 23, 2009
Report Abuse
Ashton R.
Appraiser
Hammond, LA

Well according to the 2nd quarter 2009 Korpacz report, cap rates should be from 5-11% for regional malls. The average is 7.79% that increased 108 basis points since 2nd Qtr of 2008. Power and strip centers are a little higher.
Some great information is in the report. I don't have the medical office figures. In my market, with the lack of funds there has been a lack of sales that could skew the information.

Jun 23, 2009
Report Abuse
Paul S.
Broker/Agent
Glendora, CA

Srini
Cap rate is merely the relationship of the income to the price. It only looks at one year and does not include any debt payments. Cap answers the question "if I pay X dollars for Y return (net operating income) what is my rate of return? The formula is NOI/Price=Cap rate. As you mentioned in your question they vary depending on the type of property and the location. Caps serve as a barometer for you to gage how one property compares in price, relative to its income, to another. Most generally there will be a "going" cap rate for a particular type of property in a particular area. A cap on a NNN fast food restaurant in Southern California might be 5.5% and 8% in Missouri. If the NOI was the same on both, the property in Missouri would be much cheaper for the same income relative to the one in California. Find out what the "going" cap rate is for the type of property is in the area you are looking. When you find something you like compare the cap you will be getting to the comparables to see how it measures up. Use cap as a comparison tool but beware many times the cap rate is misstated by listing agents and sellers. To really see how a property performs over time, and to compare one property to another, you should take into consideration other factors like variable cash flows over multiple years, debt (remember cap is calculated as if you paid cash on only for one year), market cycles, etc. That calculation is internal rate of return (IRR). IRR will look at as many years as you want to look at and project how much you will make on every dollar you have invested, for every year it is invested, expressed as a percentage. It is not uncommon for a cap rate to be 8% yet the IRR to be over 10%. Much will depend on the vairables that cap doesn't consider. From there you can calculate capital accumulation which will tell you how much money you have made over the course of time with the investment. IRR is the percentage Cap Accum is the dollars. paulsylvester@remax.net or 800 554-7362 for more info.
Paul Sylvester,CCIM

Jun 23, 2009
Report Abuse
Srini P.
Owner/Investor
San Jose, CA

Jessica, good question. I had the same question.
Aston. Paul,
If I am investor and does not care about the state/location, which state is the best from CAP/IRR perspective?
Also what type of commercial properties give the best IRR/CAP?

Jun 23, 2009
Report Abuse
Paul S.
Broker/Agent
Glendora, CA

As always the answer is it depends. I have some incredible NNN property available in Wisconsin and I am from California. It will depend on what you are looking for? If you are looking for something that pays a decent cash flow you probably need to look outside of California, Florida, Nevada and Arizona. If you are looking at potential future value (like Californians always do) then you can look in states that will be looking good once a recovery takes place. A good deal can be found anywhere. It all depends on what you are looking for. Caps do change with risk. A Walgreens for example only pay currently around the 7% mark (6.5% a year ago) with no rent increases for 25 years. They are wildly popular because they are considered rock solid. But stop and do a caculation on what inflation does to your money. At recent inflation rates your money will have eroded by almost 50% if memory serves me correctly. So are they good investments? They are for many people because they are willing to trade a potential higher return for a perceived lower risk. I think there are better ones with more return and only slightly more risk. The bottom line is the less risk the lower the return. You will need to identify you level of risk taking which will then translate to the property you buy.

Jun 23, 2009
Report Abuse
Srini P.
Owner/Investor
San Jose, CA

Thank you Paul for the details.

Jun 24, 2009
Report Abuse
Paul S.
Broker/Agent
Glendora, CA

Have a look at my last answer I just made to your question about Medical.

Jun 24, 2009
Report Abuse
Buddie J.
Walnut Creek, CA

restaurant cap rates in northern california

Nov 24, 2011
Report Abuse

Welcome to Answers

LoopNet Answers is where the commercial real estate community shares what they know to help each other out. And it's all for free.

Ask a question to get advice from brokers, investors, professionals and local experts.

Answer questions to raise your visibility as a trusted advisor and build new relationships.

Ask a Question

Post Question